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because the additional demands of the LIFO Retail Method prevent
accurate, subsequent year corrections of shrinkage estimation
errors. If physical inventories were required to be taken at
yearend, taxable year shrinkage would be known with certainty,
and no estimate of yearend shrinkage would be necessary.
Physical inventories, however, are not required to be taken at
yearend. Sec. 1.471-2(d), Income Tax Regs. Once the Secretary
decided not to require physical inventories at yearend, see
Dayton Hudson Corp. & Subs. v. Commissioner, 101 T.C. at 467;
sec. 1.471-2(d), Income Tax Regs., and taxpayers began to
exercise the privilege of computing yearend inventories from book
inventory records, estimations of yearend shrinkage became
inescapable, whether the method of estimating yearend shrinkage
involves calculation (the Divisions' shrinkage methods) or
substitution (respondent's method).
The realization that estimates of yearend shrinkage are an
inescapable byproduct of cycle counting reveals that Dr. LaRue's
criticisms are, in fact, a condemnation of cycle counting by
means of highlighting the additional demands of the LIFO Retail
Method, which are just as applicable to respondent's method. In
other words, errors resulting from respondent's method of
substituting yearend shrinkage for the taxable year with yearend
shrinkage for the prior taxable year are subject to the same
problems of varying tax effects arising from changing LIFO pool
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